Suppose the 5-year interest rate on a dollardenominated pure discount bond is 4.5% p.a. and the interest

Question:

Suppose the 5-year interest rate on a dollardenominated pure discount bond is 4.5% p.a. and the interest rate on a similar pure discount euro-denominatedbond is 7.5% p.a. If the current spot rate is $1.08/€, what forward prevents covered interest arbitrage?

Exchange Rate
The value of one currency for the purpose of conversion to another. Exchange Rate means on any day, for purposes of determining the Dollar Equivalent of any currency other than Dollars, the rate at which such currency may be exchanged into Dollars...